Yes, But....

Monday, February 6th, 2012 @ 11:06 am

Stocks had a good week last week, or should I say had a good day? After doing little the first four days of the week, the latest jobs report boosted stocks to a strong close for the week. Traders were looking for a Nonfarm Payroll number of 150k and an unchanged Unemployment Rate of 8.5%. As you probably read, payrolls rose by 243k and the UR dipped to 8.3%. In economic terms, this was a homerun.

Unlike most payroll reports, this one seems to have been "cleaner" than usual. By that I mean there were no obvious distortions beneath the headline number. The Bureau of Labor Statistic (BLS) did not lower the available worker pool, as it often does when we see a drop in the Unemployment Rate. Most job sectors reported growth, and hours edged slightly higher. Overall, it was a good report.

Despite the upbeat picture you know there is a "but" coming, and here it is. Actually, there are "buts." First, remember this is one month. In the three month period from February to April last year, payrolls grew each month by over 200k and averaged 239k per month. Sounds great, doesn't it? But, the next three months' payrolls averaged just 78k. This was a good number but
not an indicator of a trend.

Second, the number could very well have been distorted by seasonal factors. This was a very mild winter, but the seasonal factor in the BLS model doesn't recognize this was an abnormal year. What does this mean? The BLS model is based on historical norms. The BLS uses these to adjust the jobs numbers in an effort to "smooth" the monthly changes. In other words, when special factors, i.e. weather or seasonal hiring, occur, the BLS uses historical experiences to add or subtract jobs from the raw data to take into account short-term factors. In the case of this year, the BLS model probably added in the normal jobs that would have been temporarily lost due to weather. That's a lot to take in, but it's the best explanation I can come up with. We won't really know until a few months away whether the adjustment factor was amiss. If it did overstate the case for jobs, this will show up over the next few months if payrolls weaken quickly.

Third, many of the nitty-gritty details in the report indicate a changed job market--perhaps secularly changed, not cyclically changed. The U.S. added jobs, but the type of jobs we're seeing added are heavily weighted toward lower-wage jobs. An estimated 70% of all those unemployed who have found new jobs in the last two years are doing so at lower wages--often significantly lower. Additionally, while the hourly wage inched higher, wages are still rising at a rate below the inflation rate. The ranks of the long-term unemployed continue to grow, and the numbers of those working part-time jobs that need full-time work remain at record levels.

Yes, the last jobs report was good, but it's not a game-changer.

Interest rates rose on the upbeat news, and the bond market faces a stern test this week when the Treasury brings three new long-term debt issues to market. For months, the demand for U.S. treasuries has been surprisingly strong, but rates could rise further if stocks stay strong. I've mentioned in the past that this is seasonally a time period in which rates have a tendency to rise. We haven't seen much of that yet, but it doesn't eliminate the possibility.

This was the second week in a row in which European news did not play a major role. The Greek debt negotiations continued to drag on. Almost daily some Greek or European official assured us that a deal was within hours of being done. The fact is a deal is not yet done, and time is beginning to run short. If a deal doesn't get done this week, I'll wager that the markets will start getting very nervous. Traders have basically assumed a deal will get done and left no room for risk of a deal failure in the recent price action of stocks. Although odds heavily favor completing a deal, a surprising failure would cause an extreme market reaction.

There are no important economic statistics this week or big earnings releases. If you see a big market move this week, look to Europe for the answer.

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